Hello and welcome to the latest in these monthly webinars we've been doing, talking through global markets. For those who haven't joined before, I'm Mark Dowding, Chief Investment Officer here within the BlueBay Fixed Income platform at RBC Global Asset Management.

So where to start, there's plenty going on. There's been plenty of price action to discuss. Actually, in the course of the past week, we've actually seen US yields moving somewhat lower with markets, being encouraged by the fact that the latest inflation print we've seen has surprised the downside.

That now means we've had two better inflation numbers in a row, obviously having had some pretty problematic news on inflation earlier in the year, and that's given a bit of hope back to those looking for rate cuts in the second half of the year. And so effectively, that's really seen market participants really start to focus on the September Fed meeting, which we think is probably realistically the last window before the November election.

But it's really that particular meeting of the FOMC that is now being looked at, as is this going to be the moment where we see the 1st cut in the US cycle. Obviously, before we get there, there's still plenty of data, plenty of wood to chop. And so with markets having moved to effectively price a 75% probability on a move in September. In a way that sort of pricing is pretty much contained.

Now, we would think, unless you see much weaker data, I think it's going to be difficult for that contract to rally too much further. And price in a September cut with 100% probability. So in a way, this means that from our point of view, we continue to see the front end of the yield curve, relatively speaking, anchored in our estimation between a range of around 4.75 to 5% on the two year note. I know that we're just a touch below that at the moment. But effectively that's the zone that we've seen US yields at the front end, sitting in in terms of fair value in the run up to that September meet, obviously with more incoming inflation data, more activity, data yet to come that will really ultimately decide which way the Fed decides to go at that particular time.

Otherwise, in terms of economic activity, getting some signs of some slowing in the US economy, we've seen some weaker business confidence. Numbers also weaker confidence numbers coming through in terms of the latest Michigan survey against that, of course we had a very strong payrolls report for the latest month.

But away from the payrolls report, we're also seeing a few anecdotal signs that the labour market is starting to be maybe just a touch softer. I particularly like focusing on the weekly claims report. Obviously, this is the most high frequency data release that we get to see and look at in terms of the US labour market.

And in that regard we're actually seeing a bit of softening in terms of the latest weekly claims numbers with those ticking up to around about sort of the 2.40 level. So that being the case as mentioned yields, have moved lower. We think that the front end of the curve is still in this zone of being more or less fairly valued, though when I look out further along the yield curve, we continue to observe the current level of inversion in US rates as being something that means that longer dated yields don't really look that compelling.

I don't really think there is a big story about wanting to own duration here, unless you are in a camp where you are looking for a recession to occur, we still see recession as the tail risk not the central case. Still, to us it looks like the economy in the second half of the year is more likely to have a soft landing than a hard landing, and that being the case, when you look at the valuation of the 10 year that's got down towards 4.25. That's obviously discounting a lot of rate cuts to come. And we actually feel that it becomes difficult for the back end of the curve to actually go too far at this particular point.

I've also voiced on prior calls that we continue to be concerned about the trajectory of the deficit in the US. When we meet with policy makers, I'm concerned that on both sides of the aisle there is this narrative that actually, in the absence of the bond market sending any discipline to policymakers, why not keep on cutting taxes? Why not keep on increasing, spending, pushing up that deficit, pushing up debt levels. This is something, eventually, we are pretty convinced, is going to translate into more pressure on term premium in the US market and US yields.

For the time being of course, this has not manifest to this particular point. But again, I do think that there is a medium-term case to believe that we should be looking for a steeper US yield curve. And this is the main conviction view that we actually have in terms of US rates right now, whereas you may recall earlier in the year as arguing to be short duration.

More recently the view has been around curve steepening rather than an outright directional trade on US rates. So this is really how we're looking at things in terms of the US market.

So obviously, more data, more to be looked at and discussed as we digest this. But maybe now I'll turn my comments across to Europe because it's been a really exciting if that's the right word, a really exciting couple of weeks in terms of European markets, with a lot of that excitement obviously related to what's going on in the political sphere.

Now before covering that. It's worth noting, of course, that we did see the ECB cut rates. Its latest monetary policy. Gathering rates on euro cash were cut for the 1st time since 2019, taking the cash rate to 3.75 from 4%.

Looking forward from here, though it was notable how the EBC was actually putting up its inflation forecast for this year and next year, in a way, maybe pushing back against the idea that there will be a lot more further rate cuts any time soon. And in that regard, when investors are looking towards the September meeting from the ECB. The narrative coming from Lagarde and colleagues is that we need to see better data if we are going to see rate cuts at a September meeting.

I also pick up in terms of discussions with policymakers as well. This narrative that whether you're talking to the Bank of England or the ECB they probably won't want to cut rates in this cycle by more than 50 basis points before the Fed starts moving. So yes, that means that we could see the ECB go in September without the Fed moving at all. But if that's the case, I think it's going to be difficult to see further moves independently thereafter in the eyes of those policy makers, and, moreover, I don't think that a September move from the ECB is at all a done deal at the moment, unless, of course, we do see more benign inflation prints, and if anything of late some of the European data has actually been a little bit firmer than a little bit weaker.

That said the big thing that's been driving European markets, maybe, has been less about the ECB. It's been more about the politics. We had these EU elections which confirmed that Europe was moving towards the parties on the hard right, which is something that again, we've discussed and written about at length in prior discussions.

The results of the EU elections in many regards weren't a surprise. But what was a surprise, of course was Macron's reaction to this? A bit of a fit of peak. Perhaps, Macron announced parliamentary elections, which had been scheduled for 2027, to get brought forward to the end of this month.

That's come as quite as a shock in markets. And in a sense, here it looks like Macron has taken a bit of a gamble, hoping in part that by doing this he calls an election when others aren't ready Hoping that actually, as investors as not investors, I should say French voters actually look at the political landscape, they actually decide they don't have a taste for actually having a hard right government running the Parliament in France, and therefore, if there is a coalition of the centre. The hope, then was that move would end up, being an endorsement in Macron will actually take the wind out of Le Pen sales ahead of a Presidential vote, which is not due until 2027.

But if that was the hope, the plan, B, if you like for Macron was that if the hard right did win the elections, they'd end up in government. But make a real mess of this. And again, if that took away from the shine of Le Pen, perhaps was thinking that this was a win-win outcome for him. But I'm more inclined to think that this is more of a lose-lose scenario. Firstly, I think that Macron's gamble isn't going to pay off. I think the national rally are likely to end up as the party in power after these elections. I know there is momentum on the left with the Socialists coming together, but the most likely outcome. Looking at the situation in France here is that the parties of the hard right, I think, do end up prevailing in the parliamentary vote.

If this is the case, and they end up as the governing party. You look across the Alps at the situation in Italy, perhaps, and you can see how a party of the right in that case, Fratelli d'Italia have actually managed to govern relatively successfully under Georgia Maloney over the course of the last several quarters.

And so, from that point of view. It's not clear that by definition the national rally are going to make a mess of it. In many respects they don't need to do too much, and if they seem at all competent, whatsoever, this may actually end up cementing rather than detracting from Le Pen's credentials into the 2027 election. So I think that in the same way we saw David Cameron with that famous Brexit vote as a bit of a gamble that blew up in his face. I'm kind of worried that the same is happening here in France as well, and Macron will end up living to regret the outcome. That said, bear in mind the President in France controls the political agenda, and so, although the national rally may end up winning and failing in this particular election, there will be a limit in terms of what they can do this side of a Presidential vote.

And so, from that point of view, I'm not sure that the agenda is going to move too aggressively over the course of the next year or two, so those fearing that this is going to trigger some sort of French exit from the EU. I think that judgement is misplaced. What I do think you're likely to see, though, is a path that leads towards more fiscal easing in France, and that's not necessarily good for French bonds.

Moreover, I would argue that Macron has been very much forcing. Europe has actually been causing Europe to coalesce and come together. There has been more of an agenda towards a more integrated Europe under Macron, more of a desire to push towards a capital market union, a desire towards more coordination around EU fiscal policy.

With Macron much diminished, you lose some of that impetus, and from that point of view, in as much as we end up seeing a situation where this political shock has led to a repricing French risk by extension, it's ended up repricing European risk to a degree. And so from that point of view, we've not been surprised to see the underperformance of French OATs on a spread basis with the spread moving from 50 basis points to bonds out to 80 basis points looking forward from here.

Although we're not really looking for the spreads to retrace very much. We think that there will probably be a moment where the point of maximum stress here will probably be around the election itself in a way in the run up to the vote. Don't be surprised if Macron isn't making claims that if the national rally ending up victorious, this is going to be a financial disaster in a way he wants to scare voters to vote for his party. But if, as mentioned, the national rally end up prevailing in this particular vote. It could be that things then start to calm down afterwards. Once investors realise that there is going to be checks and balances and limit on what the party can actually do once taking office.

So from that point of view, we are inclined to continue to run what has been a long standing short for us in French OATs into the election at the end of the month, but may then be looking to book profits coming out of that particular election, though I can't see us wanting to go long or not long of OATs.

If anything, if there is an argument to go long anywhere, it could be in a market like Italy. Bear in mind that BTP spreads have actually moved wider in tandem with France over the course of the last few weeks, and from that point of view, given that Italy, oddly enough, is actually the oasis of political stability in Europe. At the minute all the political problems are more in the countries in the North, in Germany and France, in Belgium and in the Netherlands. Actually, Italy is looking a fairly stable story.

And so, if we do see more pressure on French spreads in the run up to the vote at the end of the month, then actually buying BTPs that are spread at 165, 175 over Germany, we think, could be an interesting entry opportunity.

But anyway, all of this throws back into the agenda. How policy and politics and political surprises can move markets can move the agenda. And of course we're looking to try and capitalize on the back of this. Elsewhere we've got the election happening here closer to home in the UK. At the end of the month as well. I think in this respect. It's probably unlikely to be a big shock or big surprise when we see labour prevailing and Starmer elected as UK Prime Minister.

The big interest, I think in the UK is all about exactly how many votes or how many seats the Conservative party end up winning. We could be looking at the annihilation at the Tory party here in this 1st past the post parliamentary system that we have here in the UK. A couple of percent movement in a vote share can make the difference between the Tories, ending up with 150 seats, perhaps, and actually ending up with next to nothing if they are not careful, such as the electoral math.

If you're interested in this, the very good website that you may already be familiar with is the one called electoral calculus dot com. You can play with the scenarios here to your heart's content. and actually model how good or how bad different outcomes might be.

But one of the other points of interest here could be if we end up with the Tories really doing badly, there will be pressure after the election, we think, for the parties of the right to come, together with reform led by Nigel Farage to come together with the Tory party. So there's part of me here that can half imagine a reunited Conservative party under Farage as an eventual leader. If we're not careful over the course of months and quarters to come.

So plenty to talk about when it comes to politics in the UK. And this can be something that again can be a market driver before we actually get to that election, though. This week we've got a UK inflation print. We've got a Bank of England meeting. The last UK inflation number was quite a bad one. It was a bit of a disappointment. We're actually inclined to think that UK inflation continues to disappoint a bit relative to others out there who have tended to think that UK inflation comes back towards target at 2%. I'm in the camp of thinking that inflation in the UK can actually end up being stuck close to 4%. And if I might, and if that is the case, then I think it's going to be very difficult for the Bank of England to deliver rate cuts.

The BOE certainly won't be cutting interest rates this week. I think that a rate cut in the UK isn't likely now at the earliest until we get towards September, but by then I'm expecting inflation, which has been declining in Q2 on the back of seasonals to be heading back up again as service price inflation continues to be relatively elevated.

Further afield in Japan we could see some political volatility. The position of Kishida currently looks painfully weak, and there are some rumours and suggestions that by the next time I have one of these monthly Updates he could be gone.

But actually, the bigger play in Japan is around what the Bank of Japan is doing. It had a meeting on Friday, in a way. I think it tried to give a message which effectively on Friday the Bank of Japan said it was going to be going forward with a reduction in JGB purchases on its balance sheet. But that would only kick in after the July policy meeting. So markets have been pretty frustrated that there is no action being taken in the here and now, and so the yen has continued to weaken in the wake of that particular meeting.

I thought, it's quite interesting in terms of some of Ueda's comments at the press conference. He did say that when a schedule of bond purchase reductions was actually communicated, the Bank of Japan is likely to be going straight from a position where today it's delivering quantitative, easing straight into quantitative tightening. So in many respects actually taking the balance sheets back further than I might have been foreseeing.

And so the direction of travel in Japan, I think, is clear. We are going to a world where the BoJ is going to be stepping back from the market. The BoJ has been controlling yields for a very long time. If you look at the valuation of the 30 year versus the 10 year Asset in Japan, you can actually see the overvaluation of 10 year bonds. And so as and when the BOJ steps back, we are looking for JGB yields in the 10 year part of the curve to be above one and a quarter percent. And so, being short, there is something that we continue to have as a particular conviction that we invest across our portfolios.

Otherwise, on Japanese interest rates. I had previously been hoping that the BoJ might be moving cash rates to 25 basis points in July. I think that's now probably pushed back towards September. A further move to 50 basis points, I still think, is on the cards by the end of the year, just because I'm inclined to think that inflation in Japan is going to overshoot. It's going to be above the levels that the BoJ itself has been expecting.

Elsewhere we've had more political volatility. South Africa next. That's been an interesting one. The ANC ended up with a lower share of the vote in the national elections recently held there. That's meant the party which has been in power for a very long time by itself, is now being forced into coalition and a government of national unity.

Initially there was a fear that this would encompass some of the radical parties on the hard left, the economic freedom fighters of Julius Malema and his cohort. But, as talks have progressed, actually, an outcome has been put in place which is much more market friendly with the agency, together with the Democratic Alliance and a couple of the other smaller parties.

So South African assets having had a tough time rallying back, we continue to see value in South African yields with yields 11 with inflation at 3 or 4 real yields stand out as being particularly attractive.

The same is also true in Mexico, in Mexico the big win from Claudia Sheinbaum, actually has opened the door to potential constitutional change under AMLO because of the level of the majority that the party currently has. This has ended up scaring investors. It's not something that people saw coming, and on the back of that there has been a big capitulation in Mexican assets. The Mexican peso has fallen by more than 10%. The peso had been a favoured carry trade for many for a long period of time, and so, as vol has spiked. This has seen investors closing position and on the back of that the peso has had a really pretty aggressive sell off.

All Mexican assets have been under a lot of pressure and don't get it wrong. I think that some of the steps, some of the direction of travel here which is going to ease fiscal policy isn't going to be something which is a positive agenda in Mexico for investors. But I think that one needs to keep in mind.

Actually, this is a relatively decent underlying macro story, and from that point of view I don't think ever so much is going to change. And so, having maybe been too complacent about risks in the run up to the election. Mexican assets are now probably pricing in too much risk, and so we're more inclined to take the other side of the trade and become a bit more optimistic.

The same is also true in Brazil. Brazil has had a lot of volatility as well. And again, we think this is a story where actually there has been some overshooting, some paranoia.

There's actually plenty more that I could talk about. I'm actually realising, though, in looking at my clock. time's almost slipping by on me in a moment, I'd invite any questions. And I'm more than happy to take a few questions, but before I do just to finish off some of my comments, to say something about credit markets.

Credit markets in Europe have seen volatility in terms of what we've seen in France. French credits, financials have been under particular pressure over the course of the past week but actually in credit at an index level. I'd suggest that spreads have held in really quite well. Bear in mind that when looking at markets US equities continue to keep on driving to new high after new high. And this strong backlot for US equities is keeping Vix suppressed, fixes down at 13.

And so from this point of view. This is really helping to contain movements in credit spreads. I know that investors have been looking to express hedges through CDS and other mechanisms, and so we have seen some volatility on underlying assets, but, intrinsically speaking, if we are in a world where there is a recession, if we are in a world where there is a soft landing, we actually think we're in a fairly benign landscape for credit for the time being.

And, broadly speaking, we think that the technical in credit continues to be constructive. In a world where we see an oversupply and abundance of government bonds being issued on both sides of the Atlantic. We are in a world where the net supply of corporate bonds is set to contract. This is going to help keep spreads in, particularly when we're talking about parts of the market like investment grade or high yield bonds and where I might be more bearish in some parts of the credit market.

It's where we see assets or asset classes which we think will struggle in a world where rates do end up higher for longer. For example, anything with a lot of leverage, we think, is something that you don't want to own, which is a view that keeps us quite cautious for the time being on private market assets. But, generally speaking, on high quality credit.

As long as we don't move into recession, we think that high quality credit is looking ok. And actually, any weakness in euro spreads that we see around this French election actually could be an opportunity to add exposure or to reduce credit hedges in order to benefit from spreads following a period of spread widening.

With that, I'm going to go straight to my phone. Now. I'm going to see if anyone has come online with any questions. It looks like we've got a couple that have come through. So 1st one from Richie Hobbs. Thanks for your question. So on the US steepener trade, what is the current risk to this position, and what is currently driving US curve flattening?

Well, I think the biggest risk to the position actually would be if we end up with bad inflation data if we ended up with bad inflation data. And we ended up in a world where the Fed needed to hike again. Clearly that would be very bad news for the front end of the curve.

At the same time, if the Fed was hiking again, this would probably intensify recession risk, and this would actually be something that pushed down lower dated yield. So I think if we're in a world of inflation to the upside. I think this is the environment where the curve steep and really doesn't work.

But I think that is relatively unlikely. I continue to think that the bar to a rate hike is a very high bar at the moment. So that's not a likely scenario, from my point of view in terms of what's been driving recent curve flattening. I think. Here, one of the things that goes against curve steepening is that it's quite a consensual position. So it hasn't really been working. The other thing is also as much as we've seen an increase in the US deficit and more supply actually, what the US government, what the Treasury has been selling has been more shorter data bills. It's not been increasing the issuance of longer data bonds in its recent quarterly refunding announcements.

But I think that over time you're going to end up with more supply of those longer duration assets. So this is going to work. I just think that the trade is one that we need to be patient with. I know that the carrier is somewhat against, but in terms of what we think can be earned here. I think that this is a position that certainly has merit.

The next question I don't have who this has come from, but is a Labour Government here in the UK. Is it good for the pound? Well, I think that at one level I would voice the thought that in as much as labour may want to normalise relations with the EU. I think it could be a bit of a constructive facet for sterling. This is certainly how the market is actually thinking and leaning. I'm not expecting labour to announce another referendum, and for us to go back to the EU. It could be a narrative of trying to make Brexit work could actually see us move back towards a position where we could end up with a Norway style trade deal here in the UK.

And I do think that that would be seen, perhaps in a constructive light. Certainly all the Tories have made themselves politically toxic in places like Brussels. So a complete change of the guard, a new regime, maybe some of the Europeans are more inclined to forgive and forget and move forward more constructively. I would say that Europe needs the UK in the same way that the UK needs Europe. So actually improving relations there, I think, is of merit and benefit on both sides. And so this is a positive.

All of that said, though I continue to think that the UK economy is still struggling, I think the fact that inflation could be a bit high, and this prevents the Bank of England from cutting rates again means you have a bit of stagflationary risk here in the UK economy that's not really great for the pound. So I struggle to get really British of the pound. But specifically, this political factor, maybe, is a bit of a negative compared to where we were before.

And I have one more question come through. Maybe the last question I'll take today. So where do you think terminal rates are in Europe and the US. Well, in the US. I've thought that terminal rates in my mind are well above where the Fed's long-run dot has been. That long run dot had been down at two-and-a-half percent, largely because the Fed had abandoned the Taylor rule because the Taylor rule wasn't working, and we saw for many years inflation undershooting the Fed's 2% target. But now we're in a situation where inflation is overshooting the target.

I think there is a collective sense in which no one at the Fed that I speak to believes in a two-and-a-half percent neutral rate any more. I believe that this is likely to settle more like a number like 3-and a-half, or 3.75 would be my guess.

And so, from that point of view given that we'd expect to see some positive term premium, it probably means the fair valuation for longer dated treasuries in my mind is probably around the 4-and-a-half percent sort of number. Again, why, I don't really see a really compelling directional view on US rates at the moment. You're just not a long way away from values that I would see as long-term fair value.

Otherwise, in the context of the eurozone. I think that the right level for interest rates will be a bit lower if US Inflation, I think, gets stuck between 3, 3-and-a-half. I think it's probably 2 and a half 3 in the context of the eurozone. And so from that point of view, I think that neutral rates, probably around the 2-and-a-half sort of number in the eurozone, I think, certainly makes a degree of sense to me. So that's how I'm thinking.

Thanks a lot for joining today. Appreciate you spending your time with us. If you've got any questions or comments on anything I've shared today, please don't feel shy. Do please reach out, but otherwise appreciate any feedback, but otherwise have a great month ahead.

To those here in the UK, I hope we get some summer and a week from now, just to cheer you up, the days get shorter, so the sun better arrive. But I'm still wanting to believe that there's sunshine and a euro win at the 24 championships ahead of us. And on that happy note I look forward to being able to celebrate that win the next time on here online. Thank you. Bye.